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º SPECIAL REPORT LUXURY DECEMBER 13TH 2014 Exclusively for everybody 20141213_SRluxury.indd 1 02/12/2014 17:18 SPECIAL REPORT LUXURY Exclusively for everybody The modern luxury industry rests on a paradox—but is thriving nonetheless, says Brooke Unger AT THE TRANG TIEN PLAZA shopping mall in Hanoi, Vietnam’s capital, on some evenings a curious spectacle unfolds. Couples in wedding fin- erypose forphotographsin frontofilluminated shop windows, with Sal- vatore Ferragamo, Louis Vuitton and Gucci offering the sort of backdrop for romance more usually provided by the sea or the mountains. The women are not wearing Ferragamo’s ara pumps, with their distinctive bows, or toting uitton’s subtly monogrammed handbags. They cannot ¢ afford them. Tr¡an Cuon, who assembles mobile phones at a Sam- sung factory, posed with his fiancée in a brown suit and bow tie that cost him the equivalent of $150. Some day he hopes to become a customer in the mall. Until then, he will proudly display the photos in his home. To stumble across an out- post of European luxury in a rela- tively poor and nominally social- ist country is not all that sur- prising. Luxuries such as silk have travelled long distances for many centuries, and even modern lux- CONTENTS ury-goods makers have been pur- suing wealth in new places for 3 Definitions more than a century. Georges A rose by many names uitton, son of Louis, the inven- tor of the world’s most famous 3 History Saintly or sinful? luggage, showed off the com- pany’s flat-topped trunks (better 4 The business case for stacking than traditional Beauty and the beasts round-topped ones) at the Chica- go World’s Fair in 1893. The oil- 6 China Beyond bling rich Middle East has been a mag- net for expensive foreign trinkets 7 Developing markets since the 1960s. The Japanese be- The clamour for glamour came insatiable consumers in the 1970s. Today, two in five Japanese 8 Demographic trends ¢¡ £Marques for millennials are thought to o uitton pro- duct. And nowitisChina’sturn to 10 The future of luxury lap up luxury. Experience counts ACKNOWLEDGMENTS As luxury-goods sales have expanded geographically, they have In addition to those mentioned in also spread across the social scale. When Coco Chanel created her No. 5 the text the author would like to perfume in the 1920s she reserved it forher best couture clients, but in the thank the following: John Ayton, followingdecade she sold it in smallerbottles so that more women could Annoushka; David Baxby, Global Blue; Maria Cristina Buccellati; afford it. Cartier’s “Les Must” jewellery in the 1970s put the brand within Charlotte Chiene, Dorchester Collec- reach of consumers who could only yearn for Panthère necklaces and tion; Timothy Coghlan, Savills; Tankwatches. Many other brands followed Cartier’s sortie du temple (de- Edward Dolman, Phillips; Liz Flora, scent from the temple), seeking to broaden their appeal while retaining Jing Daily; Katja Graisse, Balistik Art; Nicolas Hieronimus, L’Oréal; their cachet. Not all succeeded. Jonas Hoffman, SKEMA Business Over the past 20 years the number of luxury-goods consumers School; Paul James, Starwood worldwide hasmore than trebled to 330m, accordingto Bain & Company, Hotels; Joshua Kane, Bespoke; a consulting firm. Their spending on expensive jewellery, watches, cloth- Andrew Keith, Lane Crawford; Robert GDP Lafranco, Bloomberg; Marcus ing, handbags and so on has risen at double the rate of global . Most Margulies, Marcus Watches; Mario ofthese newbuyersare notthe veryrich butthe merelyprosperous, with A list of sources is at Ortelli, Sanford C. Bernstein; incomes ofup to €150,000 ($188,000). Shares oflisted luxury companies Economist.com/specialreports Manfredi Ricca, Interbrand; Antoine have far outperformed those ofother companies (see chart, next page). de Riedmatten, Deloitte; David Consumers’ rush to quality has created billionaires at a rate that Sil- An audio interview with Sadigh, Digital Luxury Group; the author is at ¢ Roberto Stern, H. Stern; Elizabeth ic ¤alley might envy, especially among the main shareholders ofluxu- Economist.com/audiovideo/ Walker, James Purdey & Sons. ry conglomerates that have gathered together many of the best-known 1 specialreports The Economist December 13th 2014 1 SPECIAL REPORT LUXURY as they get more expensive because they confer yet more status. And the margins even on lesserluxury goods are much bet- ter than on mass-market items. Luxury companies like to set their own agenda. Theircreative directors over- see both the development of new pro- ducts and the way they are presented in magazines, shop windows and online. “We are not going to let people influence the vision,” says PatrickAlbaladejo, depu- ty managing director of Hermès, a French luxury house so august it claims not to have a marketing department. Luxury companies often get the mostattention forthe thingstheysell least of. Karl Lagerfeld, Chanel’s creative direc- tor, made headlines this year by sending his models down a catwalk decked out as a grocery shop. But “the bread and butter of the company are chemicals,” explains Armando Branchini of the Altagamma Foundation, which represents Italian lux- ury firms. Luxury perfumes and cosmet- ics are thought to account for over half of Chanel’s business. Diageo, a big drinks company, has a “Reserve” division that gives special at- 2 brands. They include Bernard Arnault, a French tycoon who con- tention to its priciest tipples, such as Johnnie Walker Blue Label trols LVMH, owner of Louis Vuitton, Moët & Chandon cham- whisky.They are marketed through the patient cultivation ofthe pagne and a host ofother brands, and his rival François-Henri Pi- coolest bars and influential “advocates”. “You need to be a black nault, whose Kering group owns Gucci, a big Italian belt in relationships when it’s about luxury,” says James Thomp- leather-goods maker. Nick Hayek’s Swatch Group and Johann son, who runs the division. Rupert’s Richemont (Cartier’s owner) are powerhouses in Luxury’s lens does odd things to the map as well. Europe is watches and jewellery. Among the owners who have made for- still the pre-eminent maker; its brands account for 70% of the tunes from selling stakes to investors in the past few years are world’s luxury consumption. Germany matters in cars and Brunello Cucinelli, whose eponymous company makes casual- yachts, but the real powerhouse is Italy, which serves as the chic clothing at serious prices, and Remo Ruffini, a fellow Italian workshop for French fashion and leather goods as well as its who floated Moncler, a maker ofdown jackets. own. Luxury is “one of the few industries where Europe has a Personal luxury goods are just one small corner of this em- sustainable competitive advantage”, says Michael Ward, manag- pire of opulence. Upmarket options can be found in industries ing director ofHarrods, a posh London department store. Ameri- from health care to banking, though most analysts leave such ca is both an underexploited market, given its wealth, and a base things out of their reckoning. Using consumers’ own perception for brash competitors such as Coach, Michael Kors and Kate of what constitutes luxury goods and services, the Boston Con- Spade, which are challenging established European brands with sultingGroup reckonsthat$1.8 trillion wasspenton such items in a more affordable take on luxury. China, alreadya voracious con- 2012. The biggest category is travel, followed by cars and then sumer, is just beginning to stir as an exporter. personal luxury goods. Bain comes up with a smaller sum for a similar spread of sectors (see chart). But luxury’s boundaries are The pope doesn’t wear Prada fuzzy and hotly disputed. Of late, though, the champagne has gone a bit flat. The war This special report will concentrate on personal goods, in Ukraine and the sanctions imposed on Russia in response which face the tricky task of trying to achieve global scale while have put offrich citizens ofthat country, among the giddiest new maintaining the artisan roots that give them rarity appeal. Ultra- consumers. The Japanese went on a spree early this year ahead expensive cars will make only a brief appearance, and yachts of a rise in value-added tax, then stopped spending. The Ebola will just sail by on the horizon: globally, only 14,000 people are epidemic in Africa and pro-democracy protests in Hong Kong, able to afford a really big one. But the report will include such where Chinese mainlanders do much of their shopping, have fast-growing“experiential” sectorsashotelsand wine, which are unnerved consumers. Most important, slower economic growth growing faster than things to buy and own. and the anti-corruption campaign mounted by Xi Jinping, Chi- To view the world through the lens of luxury is to see it na’s leader, have dampened the spirits of Chinese shoppers, subtly altered. Some of the normal rules do not apply to luxury- who now account fornearly a third ofthe global demand forper- goodsmakers, even though in manywaystheyare similar to oth- sonal luxury goods. The share prices of recently listed luxury erconsumer-goodscompanies. The costofproduction isnot usu- companies have fallen by a quarter this year. After two decades ally a prime concern and capital investment is generally modest, when annual growth averaged nearly 6%, the rate this year will § © ¦¨ ¥ except for watches. A really prestigious item c ¥eblen be just 2%, predict Bain and Altagamma. good”, named afteran American economist born in the mid-19th These passing crises come on top of more profound century who noticed that demand for some goods actually rises changes. One of them is a shift from “having” to “being”, espe- 1 2 The Economist December 13th 2014 SPECIAL REPORT LUXURY 2 cially in rich countries, where the well-off are becoming less Definitions keen on owning and more interested in experiencing things.